Getting a loan funded in a "distressed market" area is much tougher with new underwriting requirements.

With lenders changing up their funding requirements on what seems to be a daily basis, it’s getting harder and harder for buyers with low down payments to get into homes.

Declining Market Issues

Getting a home loan funded has become much more challenging with the recent decision to deny loans based on a single check-box on the appraisal document that indicates that the property is in a "declining market" area. One quick tick of the pen, and a previously good deal can go south in an instant. No matter that the appraised value is significantly higher than the purchase price… if that dreaded box is checked, then your loan amount will automatically be reduced by 5%, meaning that you’ll either have to come up with the additional funds or lose the deal.

Question: How do we know if an appraiser really considers a home to be in a declining market area, or if he is just doing a big CYA by checking that box? How many potential homebuyers are going to be left in the lurch because of one person’s opinion?

I was shocked to hear that the appraiser’s opinion overrides any other data that the lending institution may have regarding the area that the home is located in. What power these lowly appraisers wield these days! Imagine being able to deny homeownership to someone just by checking a single box on a form…

Both buyers and sellers will be affected by these new guidelines, but buyers take it in the shorts a bit more because this "declining market" issue tends to rear its ugly head too late in the game to either save the deal with a different lender or back out of the deal without penalty. To add insult to their injury, if this happens after the buyers have removed their contingencies, then the seller may also keep their escrow deposit as "damages".

What Can You Do to Protect Yourself as a Buyer?

How do you protect yourself as a buyer? There’s truly no way to be 100% protected these days unless you can qualify for an FHA loan or have additional funds in reserve (or wealthy relatives) who can ante up more funds if the "declining market" issue rears its ugly head.

Do be sure to stay on top of your lender to make sure that they have everything in order, and ask via email so you have the response in writing. Many loans fall apart due to lender’s failure to get certain tasks, such as appraisals and appraisal reviews, done in a timely manner.

Keep your fingers crossed that the higher FHA lending limits will get approved, since those loans don’t have the same requirements as conventional loans.

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